SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended June 30, 2001
Commission file number: 1-12162
BORGWARNER INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3404508
State or other jurisdiction of (I.R.S. Employer
Incorporation or organization Identification No.)
200 South Michigan Avenue, Chicago, Illinois 60604
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 322-8500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
On July 31, 2001 the registrant had 26,313,919 shares of Common Stock
outstanding.
BORGWARNER INC.
FORM 10-Q
SIX MONTHS ENDED JUNE 30, 2001
INDEX Page No.
PART I. Financial Information
Item 1. Financial Statements
Introduction 2
Condensed Consolidated Balance Sheets at
June 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations for the three
months ended June 30, 2001 and 2000 4
Consolidated Statements of Operations for the six
months ended June 30, 2001 and 2000 5
Consolidated Statements of Cash Flows for the six
months ended June 30, 2001 and 2000 6
Notes to the Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 19
PART II. Other Information
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 6. Exhibits and Reports on Form
8-K 20
SIGNATURES 21
BORGWARNER INC.
FORM 10-Q
SIX MONTHS ENDED JUNE 30, 2001
PART I.
ITEM 1.
BorgWarner Inc. and Consolidated Subsidiaries'
Financial Statements
The financial statements of BorgWarner Inc. and Consolidated Subsidiaries
("Company") have been prepared in accordance with the instructions to Form 10-Q
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
statements are unaudited but include all adjustments, consisting only of
recurring items, except as noted, which the Company considers necessary for a
fair presentation of the information set forth herein. The results of
operations for the six months ended June 30, 2001 are not necessarily indicative
of the results to be expected for the entire year. The following financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(millions of dollars except share data)
(Unaudited)
June 30, December 31,
2001 2000
A S S E T S
Cash and cash equivalents $ 23.6 $ 21.4
Receivables 197.0 168.9
Inventories 143.3 161.6
Deferred income tax asset 1.7 1.7
Investments in businesses held
for sale 19.5 31.7
Prepayments and other current
assets 26.7 25.3
------ --------
Total current assets 411.8 410.6
Property, plant, and equipment
at cost 1,302.1 1,279.3
Less accumulated depreciation 507.5 472.1
------- --------
Net property, plant and
equipment 794.6 807.2
Investments and advances 138.9 142.7
Goodwill, net 1,179.2 1,203.1
Deferred income tax asset 39.2 49.4
Other noncurrent assets 157.2 152.9
------- -------
Total other assets 1,514.5 1,548.1
------- -------
$2,720.9 $2,765.9
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Notes payable $27.0 $ 54.4
Accounts payable and accrued
expenses 377.9 408.2
Income taxes payable 87.2 67.3
-------- --------
Total current liabilities 492.1 529.9
Long-term debt 707.1 740.4
Long-term retirement-related
liabilities 345.2 345.2
Other long-term liabilities 55.4 53.0
Total long-term liabilities400.6 398.2
Minority Interest 9.0 10.3
Capital stock:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued -- --
Common stock, $.01 par value; authorized
50,000,000 shares; issued shares of
27,039,968 in 2001 and outstanding
shares of 26,311,919 in 2001 0.3 0.3
Non-voting common stock, $.01 par value;
authorized 25,000,000 shares; none issued
and outstanding in 2001 -- --
Capital in excess of par value715.7 715.7
Retained earnings 459.3 422.9
Management shareholder notes (2.5) (2.5)
Accumulated other comprehensive
income (loss) (31.0) (16.0)
Common stock held in treasury, at cost:
728,049 shares in 2001 (29.7) (33.3)
------- -------
Total stockholders' equity 1,112.1 1,087.1
------- ------
$2,720.9 $2,765.9
======== ======
See accompanying Notes to Consolidated Financial Statements
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(millions of dollars except share data)
Three Months Ended
June 30,
2001 2000
Net sales $ 602.0 $700.9
Cost of sales 458.4 531.3
Depreciation 25.7 25.9
Selling, general and adm-
inistrative expenses59.3 57.8
Minority interest 0.7 0.4
Goodwill amortization 10.3 10.7
Equity in affiliate earnings
and other income (4.6) (4.7)
------ ------
Earnings before interest expense, finance
charges and income taxes 52.2 79.5
Interest expense and
finance charges 12.4 15.9
------- -----
Earnings before income taxes39.8 63.6
Provision for income taxes 15.1 23.5
Net earnings $ 24.7 $ 40.1
======= ==========
Net earnings per share
Basic $ 0.94 $ 1.52
======== =========
Diluted $ 0.93 $ 1.51
======== =========
Average shares outstanding (thousands)
Basic 26,309 26,433
========= =========
Diluted 26,457 26,545
========= =========
Dividends declared per
share $ 0.15 $ 0.15
========= =========
See accompanying Notes to Consolidated Financial Statements
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(millions of dollars except share data)
Six Months Ended
June 30,
2001 2000
Net sales $1,208.8 $1,431.1
Cost of sales 929.6 1,081.5
Depreciation 52.8 52.1
Selling, general and admini-
strative expenses 114.9 121.3
Minority interest 1.4 1.2
Goodwill amortization 20.9 21.7
Equity in affiliate earnings
and other income (9.3) (8.3)
------- -------
Earnings before interest expense, finance
charges and income taxes 98.5 161.6
Interest expense and finance
charges 25.2 31.8
-------- --------
Earnings before income taxes 73.3 129.8
Provision for income taxes 27.5 48.7
-------- -------
Net earnings $45.8 $ 81.1
======== =======
Net earnings per share
Basic $ 1.74 $ 3.05
======== =======
Diluted $ 1.73 $ 3.04
======== =======
Average shares outstanding (thousands)
Basic 26,279 26,554
======= ========
Diluted 26,427 26,656
======== ========
Dividends declared per share $ 0.30 $ 0.30
======== ========
See accompanying Notes to Consolidated Financial Statements
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(millions of dollars)
Six Months Ended
June 30,
Operating 2001 2000
Net earnings $ 45.8 $ 81.1
Non-cash charges to operations:
Depreciation 52.8 52.1
Goodwill amortization 20.9 21.7
Other, principally equity in affi-
liate earnings (10.7) (7.4)
Changes in assets and liabilities, net of effects of
acquisitions and divestitures:
Increase in receivables (44.7) (43.5)
(Increase) decrease in inventories 10.5 (21.3)
Increase in prepayments and other
current assets (2.3) (7.6)
Increase (decrease) in accounts
payable and accrued expenses (8.0) 19.1
Increase in income taxes payable 20.8 3.1
Net change in other long-term
assets and liabilities 13.5 17.3
------ ------
Net cash provided by operating
activities 98.6 114.6
Investing
Capital expenditures (50.6) (78.6)
Net proceeds from capital disposals 1.0 1.8
Proceeds from sale of businesses 12.8 122.3
Payments for taxes on businesses sold - (43.0)
Net cash (used in) provided by
investing activities (36.8) 2.5
Financing
Net decrease in notes payable (25.0) (41.3)
Additions to long-term debt 15.2 50.1
Reductions in long-term debt (42.1) (88.5)
Payments for purchases of
treasury stock - (18.6)
Proceeds from stock options
exercised 2.4 0.2
Dividends paid (7.9) (8.0)
------ -------
Net cash used in financing
activities (57.4) (106.1)
Effect of exchange rate changes
on cash and cash equivalents (2.2) (11.4)
------ -------
Net increase (decrease) in cash
and cash equivalents 2.2 (0.4)
Cash and cash equivalents at
beginning of year 21.4 21.7
Cash and cash equivalents at end
of period $ 23.6 $21.3
Supplemental Cash Flow Information
Net cash paid during the period for:
Interest $ 26.0 $ 33.8
Income taxes 13.1 92.6
Non-cash financing transactions:
Issuance of treasury stock for
management notes $ - $ 0.5
Issuance of common stock for Executive Stock
Performance Plan 1.0 1.1
See accompanying Notes to Consolidated Financial Statements
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Research and development costs charged to expense for the three and six
months ended June 30, 2001 were $29.7 million and $56.9 million. Research and
development costs charged to expense for the three and six months ended June 30,
2000 were $29.3 million and $59.0 million.
(2) Inventories consisted of the following (millions of dollars):
June 30, December 31,
2001 2000
Raw materials $ 59.4 $ 73.1
Work in progress 52.4 42.0
Finished goods 31.5 46.5
-------- -----------
Total inventories $143.3 $161.6
========= ============
(3) The Company has a 50% interest in NSK-Warner K.K. ("NSK-Warner"), a joint
venture based in Japan that manufactures automatic transmission components and
systems. The Company's share of the earnings or losses reported by NSK-Warner
is accounted for using the equity method of accounting. NSK-Warner has a fiscal
year-end of March 31.
The Company's investment in NSK-Warner was $135.3 million at June 30, 2001 and
$140.9 million at December 31, 2000.
Following are summarized financial data for NSK-Warner. Balance sheet data is
presented as of June 30, 2001 and March 31, 2001 and statement of income data is
presented for the three months ended June 30, 2001 and 2000. The Company's
results include its share of NSK-Warner's results for the three and six months
ended May 31, 2001 and May 31, 2000.
June 30, March 31,
2001 2001
Balance Sheet (in millions)
Current assets $ 134.0 $ 147.6
Noncurrent assets 148.6 151.7
Current liabilities (excluding
debt) 83.8 94.3
Noncurrent liabilities
(excluding debt) 5.3 5.5
Three Months Ended
June 30,
2001 2000
Statement of Income (in millions)
Net sales $ 69.9 $ 84.0
Gross profit 14.4 18.3
Net income 5.8 7.5
(4) The Company's provisions for income taxes for the three and six months ended
June 31, 2001 and 2000 are based upon estimated annual tax rates for the year
applied to federal, state and foreign income. The effective rate differed from
the U.S. statutory rate primarily due to a)state income taxes, b)foreign rates
which differ from those in the U.S., c)realization of certain business tax
credits, including foreign tax credits and research and development credits and
d)other non-deductible expenses, such as goodwill.
(5) Following is a summary of notes payable and long-term debt:
June 30, 2001 December 31, 2000
Current Long-Term Current Long-Term
DEBT (millions of dollars)
Bank borrowings $ 22.0 $ 52.2 $ 48.7 $ 57.7
Bank term loans due through 2009
(at an average rate of 3.8% at
June, 2001 and 3.3% at
December, 2000) 4.1 20.5 4.7 23.1
7% Senior Notes due 2006,
net of unamortized discount - 141.8 - 142.8
6.5% Senior Notes due 2009,
net of unamortized discount - 185.5 - 188.4
8% Senior Notes due 2019,
net of unamortized discount - 136.6 - 139.9
7.125% Senior Notes due 2029,
net of unamortized discount - 169.2 - 187.3
Capital lease liability 0.9 1.3 1.0 41.2
------- ------ ----- -----
Total notes payable and
long-term debt $ 27.0 $ 707.1 $ 54.4 $740.4
======== ======== ======= =======
The Company maintains a $350 million revolving credit facility. At June 30,
2001, the Company had $6.5 million of contingent obligations under standby
letters of credit. At December 31, 2000, the facility was unused. The facility
is available through July, 2005.
The credit agreement contains numerous financial and operating covenants
including, among others, covenants requiring the Company to maintain certain
financial ratios and restricting its ability to incur additional indebtedness.
In July, 2001, the Company entered into an interest rate swap agreement with a
financial institution to swap interest on $100 million of 7% fixed rate Senior
Notes for variable interest at LIBOR plus .98% (approximately 4.8% at June 30,
2001). The agreement terminates when the underlying Notes mature on November 1,
2006. This interest rate swap will be recorded as fair value hedge and be
counted for in accordance with FASB 133.
(6) The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
United States Environmental Protection Agency and certain state environmental
agencies and private parties as potentially responsible parties ("PRPs") at
various hazardous waste disposal sites under the Comprehensive Environmental
Response, Compensation and Liability Act ("Superfund") and equivalent state laws
and, as such, may presently be liable for the cost of clean-up and other
remedial activities at 46 such sites. Responsibility for clean-up and other
remedial activities at a Superfund site is typically shared among PRPs based on
an allocation formula.
Based on information available to the Company, which in most cases, includes: an
estimate of allocation of liability among PRPs; the probability that other PRPs,
many of whom are large, solvent public companies, will fully pay the cost
apportioned to them; currently available information from PRPs and/or federal or
state environmental agencies concerning the scope of contamination and estimated
remediation costs; remediation alternatives; estimated legal fees; and other
factors, the Company has established a reserve for indicated environmental
liabilities with a balance at June 30, 2001 of approximately $20.3 million. The
Company expects this amount to be expended over the next three to five years.
BorgWarner believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial condition or
future operating results, generally either because estimates of the maximum
potential liability at a site are not large or because liability will be shared
with other PRPs, although no assurance can be given with respect to the ultimate
outcome of any such matter.
In connection with the sale of Kuhlman Electric Corporation, the Company agreed
to indemnify the buyer and Kuhlman Electric for certain environmental
liabilities relating to the past operations of Kuhlman Electric. During 2000,
Kuhlman Electric notified the Company that it discovered potential environmental
contamination at its Crystals Springs, Mississippi plant while undertaking an
expansion of the plant.
The Company has been working with the Mississippi Department of Environmental
Quality ("MDEQ") and Kuhlman Electric to investigate the extent of the
contamination. The investigation has revealed the presence of PCBs in portions
of the soil at the plant and neighboring areas. In cooperation with the MDEQ
and the United States Environmental Protection Agency, the Company has addressed
the contiguous areas, and has submitted plans to address additional areas. In
May 2001, Kuhlman Electric and others, including the Company, were sued by
twenty-two plaintiffs, who claim personal and property damage. The Company has
moved to be dismissed from this lawsuit.
The Company has filed a lawsuit against Kuhlman Electric seeking a declaration
of the scope of the Company's contractual indemnity. As the clean-up is
continuing, and the courts have not yet ruled on the lawsuits, the Company
cannot currently estimate the potential liability associated with this matter.
(7) Comprehensive income is a measurement of all changes in stockholders'
equity that result from transactions and other economic events other than
transactions with stockholders. For the Company, this includes foreign currency
translation adjustments, changes in minimum pension liability adjustments and
net earnings. The amounts presented as other comprehensive income, net of
related taxes, are added to net income which results in comprehensive income.
The following summarizes the components of other comprehensive income on a
pretax and after-tax basis for the periods ended June 30,
($ in millions) Three Months
2001 2000
Income Income
tax After- tax After-
Pretax effect tax Pretax effect tax
Foreign currency
translation
adjustments $(20.6) $ 7.8 $(12.8)$(12.4) $ 4.7 $(7.7)
Net income as reported 24.7 40.1
------ ------
Total comprehensive income $ 11.9 $32.4
======= ======
($ in millions) Six Months
2001 2000
Income Income
tax After- tax After-
Pretax effect tax Pretax effect tax
Foreign currency
translation
adjustments $(23.7) $ 8.9 $(14.8)$(28.7) $ 10.9 $(17.8)
Net income as reported 45.8 81.1
------ ------
Total comprehensive income $ 31.0 $63.3
======= ======
The components of accumulated other comprehensive income (loss),net of tax,
in the Consolidated Balance Sheets
are as follows:
($ in millions) June 30, December 31,
2001 2000
Foreign currency translation adjustment $(30.8) $(15.8)
Minimum pension liability adjustment (0.2) (0.2)
------- --------
Total comprehensive income (loss) $(31.0) $(16.0)
======== =========
(8) The following tables show sales, earnings before interest and taxes and
total assets for each of the
Company's five reportable business segments.
Sales
Three Months Ended June 30,
2001 2000
Inter- Inter-
Customer segment Net Customer segment Net
Air/Fluid Systems $ 92.6 $ 2.0 $ 94.6 $ 111.3 $ 2.3 $ 113.6
Cooling Systems 58.0 0.1 58.1 76.8 0.1 76.9
Morse TEC 215.4 5.8 221.2 219.2 6.9 226.1
TorqTransfer Systems 129.1 0.2 129.3 142.7 0.5 143.2
Transmission Systems 106.9 2.9 109.8 111.7 2.1 113.8
Divested Operations 0.0 - 0.0 39.2 0.1 39.3
Inter-segment eliminations - (11.0) (11.0) - (12.0) (12.0)
------ ----- ----- ---- ------ -------
Consolidated $ 602.0 $ - $ 602.0 $ 700.9 $ - $ 700.9
====== ==== ====== ======= ====== =======
Sales
Six Months Ended June 30,
2001 2000
Inter- Inter-
Customer segment Net Customer segment Net
Air/Fluid Systems $ 181.6 $ 3.9 $ 185.5 $ 232.7 $ 5.0 $ 237.7
Cooling Systems 116.3 0.1 116.4 156.8 0.2 157.0
Morse TEC 430.6 11.3 441.9 446.7 14.2 460.9
TorqTransfer Systems 254.1 0.6 254.7 289.5 1.0 290.5
Transmission Systems 208.2 5.6 213.8 224.9 4.4 229.3
Divested Operations 18.0 0.0 18.0 80.5 0.1 80.6
Inter-segment
eliminations - (21.5) (21.5) - (24.9) (24.9)
------- ------- ------- ------- -------- --------
Consolidated $1,208.8 $ - $1,208.8 $ 1,431.1 $ - $1,431.1
========= ======== ======== ======== ========= ========
Earnings Before Earnings Before
Interest & Taxes Interest & Taxes
Three Months Ended Six Months Ended
June 30, June, 30
2001 2000 2001 2000
Air/Fluid Systems $ 6.1 $ 10.1 $ 9.0 $ 25.8
Cooling Systems 2.1 10.2 4.0 21.2
Morse TEC 30.9 32.5 58.9 65.8
TorqTransfer Systems6.2 9.4 10.2 19.7
Transmission Systems11.9 13.5 23.9 28.2
Divested Operations 0.0 1.8 (0.2) 4.2
----- ----- ------- -----
Total 57.2 77.5 105.8 164.9
===== ====== ======== ========
Corporate, including
equity in affiliates(5.0) 2.0 (7.3) (3.3)
Consolidated $ 52.2 79.5 $ 98.5 $ 161.6
Total Assets
June 30, Dec. 31,
2001 2000
Air/Fluid Systems $ 391.5 $403.2
Cooling Systems 520.8 536.8
Morse TEC 993.4 1,017.7
TorqTransfer Systems 250.0 250.3
Transmission Systems 360.1 353.1
Divested Operations 0.0 73.6
------ -------
Total 2,515.8 2,634.7
Corporate, including
equity in affiliates 205.1 131.2
------- ---------
Consolidated 2,720.9 $2,765.9
======== =========
Divested operations includes: 1) the fuel systems business which was sold in
April 2001 and 2) the Company's HVAC business which was sold in December 2000.
(9)Restructuring and other non-recurring charges totaling $62.9 million pre-tax
were incurred in the second half of 2000 in response to deteriorating market
conditions. The charges included the rationalization and integration of certain
businesses and actions taken to bring costs in line with vehicle production
slowdowns in major customer product lines.
Of the $62.9 million in pretax charges, $47.3 million represents non-cash
charges. Approximately $4.4 million was spent in 2000 and $9.4 million was spent
during the six months ended June 30, 2001. The remaining $1.8 million is
expected to be spent in the remainder of 2001. We expect to fund the total cash
outlay with cash flow from operations. The actions taken are expected to
generate approximately $19 million in annualized savings, primarily from lower
salaries and benefit costs and reduced depreciation charges, beginning in 2001.
These savings are expected to be more than offset by the impact of lower revenue
from the deterioration in the automotive and heavy-duty truck markets.
Components of the restructuring and other non-recurring charges are detailed in
the following table and discussed further below.
Balance at
Total Amount June 30,
(millions of dollars) Charges Incurred 2001
Severance and other
benefit costs $ 8.9 $ (8.0) $ 0.9
Asset write-downs 11.6 (11.6) -
Loss on anticipated
sale of business 35.2 (35.2) -
Other exit costs
and non-recurring
charges 7.2 (6.3) 0.9
------ ------ ------
Total $ 62.9 $ (61.1) $ 1.8
======= ========= ========
Severance and other benefit costs relate to the reduction of approximately 220
employees from the workforce. The reductions affect each of our operating
segments, apart from TorqTransfer Systems, across each of our geographical
areas, and across each major functional area, including production and selling
and administrative positions. As of June 30, 2001, approximately $8.0 million
had been paid for severance and other benefits for terminated employees. The
remaining reductions and cash payments should be completed by the end of 2001.
Asset write-downs primarily consist of the write-off of impaired assets that
will no longer be used in production as a result of the industry downturn. Such
assets have been taken out of production and are being disposed.
Loss on anticipated sale of business is related to the fuel systems business,
which was previously reported as an investment in businesses held for sale on
the Consolidated Balance Sheet. Fuel systems produced metal tanks for the
heavy-duty truck market in North America and did not fit the Company's strategic
focus on powertrain technology. In April 2000, the Company announced its
intention to sell this non-core business, which was acquired as part of the
vehicle products business of Kuhlman Corporation in March 1999. With the
deterioration of the North American heavy-duty truck market in the second half
of 2000, the value of this business had significantly decreased, creating the
$35.2 million loss. As discussed in Note 10, in April 2001 the Company
completed its sale of the fuel systems business.
Other exit costs and non-recurring charges are primarily non-employee related
exit costs incurred to close certain non-production facilities the Company no
longer needs.
(10) In April 2001, the Company completed the sale of its fuel systems business
to an investor group led by TMB Industries, a private equity group. The
transaction did not have a significant impact on the Company's results of
operations, financial condition or cash flows.
(11) On April 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 140 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." The adoption of this statement has not had
and is not expected to have a material effect on the Company's results of
operations, financial condition or cash flows.
The Company securitizes and sells certain receivables through third party
financial institutions without recourse. The amount sold can vary each month
based on the amount of underlying receivables, up to a maximum of $150 million.
During the six months ended June 30, 2001, the amount of receivables sold ranged
from $128 million to $150 million. There are no gains or losses booked as a
result of these transactions. At June 30, 2001, the Company had sold $150
million of receivables under a $153 million Receivables Transfer Agreement for
face value without recourse.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations" and SFAS No. 142 "Goodwill and
Other Intangible Assets".
SFAS 141 requires that all business combinations completed after June 30, 2001
be accounted for under the purchase method only and that certain acquired
intangible assets in a business combination be recognized as assets apart from
goodwill. There are also transition provisions that apply to business
combinations completed before July 1, 2001, that were accounted for by the
purchase method.
SFAS No. 142, effective January 1, 2002, specifies that goodwill and some
intangible assets will no longer be amortized but instead will be subject to
periodic impairment testing.
The Company is currently assessing the impact that adoption of SFAS No. 141 and
SFAS No. 142 will have on its financial position and results of operations. As
of June 30, 2001, the Company had goodwill, net of accumulated amortization, of
approximately $1,179.2 million, which will be subject to the transitional
assessment provisions of SFAS No. 142. Amortization expense related to goodwill
was $20.9 million and $21.7 million for the six-month periods ended June 30,
2001 and 2000, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
BorgWarner Inc. (the "Company") is a leading global supplier of highly
engineered systems and components for powertrain applications. Its products are
manufactured and sold worldwide, primarily to original equipment manufacturers
("OEMs") of passenger cars, sport-utility vehicles, trucks, commercial
transportation products and industrial equipment. The Company operates
manufacturing facilities serving customers in the Americas, Europe and Asia, and
is an original equipment supplier to every major OEM in the world.
RESULTS OF OPERATIONS
The Company's products fall into five reportable operating segments: Air/Fluid
Systems, Cooling Systems, Morse TEC, TorqTransfer Systems and Transmission
Systems. The following tables present net sales and earnings before interest and
taxes ("EBIT") by segment for the three and six months ended June 30, 2001 and
2000 in millions of dollars.
Three Months Six Months
NET SALES June 30, June 30,
2001 2000 2001 2000
Air/Fluid Systems $ 94.6 $ 113.6 $ 185.5 $ 237.7
Cooling Systems 58.1 76.9 116.4 157.0
Morse TEC 221.2 226.1 441.9 460.9
TorqTransfer Systems 129.3 143.2 254.7 290.5
Transmission Systems 109.8 113.8 213.8 229.3
Divested operation 0.0 39.3 18.0 80.6
------ ------ -------- --------
613.0 712.9 1,203.3 1,456.0
Intersegment elimination (11.0) (12.0) (21.5) (24.9)
------- ------- -------- --------
Net sales $ 602.0 $ 700.9 $1,208.8 $ 1,431.1
======== ======= ======== =========
Three Months Six Months
EBIT June 30, June 30,
2001 2000 2001 2000
Air/Fluid Systems $ 6.1 $ 10.1 $9.0 $ 25.8
Cooling Systems 2.1 10.2 4.0 21.2
Morse TEC 30.9 32.5 58.9 65.8
TorqTransfer Systems 6.2 9.4 10.2 19.7
Transmission Systems 11.9 13.5 23.9 28.2
Divested operations 0.0 1.8 (0.2) 4.2
------ ------ ------- ------
EBIT $ 57.2 $ 77.5 $ 105.8 $ 164.9
======== ======= ======= ========
Consolidated sales for the second quarter ended June 30, 2001 totaled $602
million, a 14% decline over the second quarter of 2000. For the Company's
ongoing businesses, the decline was 9%. This decline was in line with the North
American automotive market, which experienced production decreases of 13%.
Geographically, the Company's sales decline was most significant in North
America with lesser amounts coming from Asia and Europe. Of the overall sales
decline, $14 million was the result of weaker currencies in both Europe and
Japan. The Morse TEC and Transmission Systems groups are the most affected by
European and Asian currency fluctuations. Second quarter income declined from
$40.1 million to $24.7 million, a 38% reduction. In addition to the falloff in
volumes, there are certain fixed costs in the statement of operations such as
depreciation, amortization, and interest that cause the percentage decrease in
income to be greater than the percentage decrease in sales. Despite the decline
in income, the Company was able to reduce debt levels by approximately $61
million during the quarter through a combination of strong working capital
management and control of capital spending. This effort occurred across all of
the Company's business groups. Also contributing was approximately $13 million
in proceeds from divested operations.
The Air/Fluid Systems business was off almost 17% compared to 2000 and EBIT
declined by $4 million or 40%. Production declines at Chrysler, a major
customer of this group, were primarily responsible for the overall sales
falloff.
The Cooling Systems business suffered from the continued decline in the
commercial vehicle arena, where volumes in North America have fallen 40% from
the 2000 annual rate. Second quarter 2001 sales and EBIT were down 24% and 79%
from second quarter 2000, respectively. The group was also negatively impacted
by a model changeover, which eliminated one application. This lost business is
expected to be replaced, but not until the end of 2001.
The Morse TEC group had a sales decline of only 2%. The North American
automotive downturn affected this group, but was partially offset by expanded
applications, particularly for engine timing systems. A softer commercial
market in North America, which translated into lower turbocharger sales, also
affected the group. The European portion of the business continued to be
strong, particularly turbochargers and engine timing systems. However, the
weakness in European currencies mitigated that growth. EBIT declined 5% due to
the previously mentioned lower volumes and a change in mix between chain
products and turbocharger products.
The TorqTransfer Systems business experienced a 10% sales decrease and a 34%
EBIT decline. Most of the sales decline related to Ford, its largest customer,
specifically reductions in Ford light truck and SUV volumes. Substantially all
of the earnings decline is attributable to the volume declines. This business
has a relatively high fixed cost structure, which causes larger swings in
earnings when volume changes.
Transmission Systems had a 4% sales decline and 12% decline in EBIT. Declines
in North American volumes were partially offset by sales increases in Europe and
Asia. Installation rates for automated transmissions continued to grow in both
Europe and Asia, helping to increase the Company's volumes in those regions.
This group has the widest range of OEM customers, and the production declines in
North America were reflected in its sales performance. Because of significant
cost cutting efforts undertaken in late 2000 and early 2001, the group was able
to limit the decrease in EBIT. This group was quick to respond to the softening
North American marketplace and took costs out of its overhead structure to be
more in line with current business levels.
Divested operations included the Company's fuel systems business, which was sold
in April 2001 and its HVAC business, which was sold in December 2000. The
transactions did not have a significant impact on the Company's results of
operations, financial condition or cash flows.
Consolidated gross margin for the second quarter of 2001, including
depreciation, was 23.9%, down 0.3 points from the second quarter of 2000. The
gross margin decline was the result of reduced volumes, partially offset by
productivity gains and cost control efforts. Selling, general and
administrative expenses increased to 9.9% of sales. This is due to increased R &
D expense, lower sales and the fact that the divisions divested since second
quarter 2000 were typically lower margin, lower SG&A cost divisions. The
selling, general and administrative category includes substantially all the
Company's spending on research and development. For the second quarter of 2001,
R & D spending totaled $29.7 million, which is up to 4.9% of sales versus $29.3
million, or 4.2% of sales. Spending at this level demonstrates the Company's
ongoing commitment to new product development, even in light of the industry
downturn. The Company will continue to monitor its research and development
spending to balance short-term affordability issues with the need to continually
update and replenish its product offering.
Goodwill amortization declined slightly from 2000 due to goodwill related to
divested businesses. Interest expense was down by $3.5 million as a result of
debt reductions throughout 2000 and 2001 as well as lower interest rates. The
Company is not as sensitive to interest rate fluctuation, because 75% of its
debt has fixed interest rates. After the July interest rate swap mentioned in
Note 5, the amount of debt with fixed interest rates will decline to 64% of
total debt.
The Company's income tax provision is based on estimated annual rates for the
year in the various jurisdictions in which the Company operates. The effective
tax rate for 2001 varies from standard federal and state rates due to the
realization of certain R&D and foreign tax credits, foreign rates that differ
from U.S. rates and the effect of non-deductible items, such as goodwill. The
Company expects effective tax rates for 2001 to be in the 37 to 38% range.
Net income was $24.7 million for the second quarter, or $0.93 per share, a
decline of 38% over the previous year quarter. Shares outstanding decreased
slightly due to share repurchases since the second quarter of 2000. Net income
was 4.1% of sales versus 5.7% last year. Had European and Asian currency
exchange rates been unchanged from last year, net income would have been $1.6
million higher for the second quarter of 2001.
For the remainder of 2001, the Company remains concerned about production rates,
particularly in North America. This holds true for both the light vehicle
market and the heavy-duty truck market. However, because of declines in
production levels in the latter part of 2000, the Company expects fourth quarter
market conditions to be similar year over year. As a result, the Company is
being very cautious in its capital investment plans and is prepared to take
additional operating actions, beyond those taken in the third and fourth
quarters of 2000, to keep its operating costs in line with the level of
production volumes. Despite these issues, the Company maintains a positive
long-term outlook for its business and is committed to ongoing strategic
investments in capital and new product development to enhance its product
leadership strategy.
FINANCIAL CONDITION AND LIQUIDITY
In the second quarter, debt declined from year-end 2000 by $60.7 million. The
debt reduction was the result of proceeds from divested businesses, proceeds
from stock options exercised, and operations, offset by dividends. Capital
spending was held to $50.6 million compared with $78.6 million last year.
Capital spending remains an area of focus, as the Company intends to be very
careful in making major investments too far in advance of a recovery in its
markets. The Company still expects to spend less than $150 million on capital
in 2001, but this level is subject to ongoing
review based on market conditions.
Spending will be a function of the timing of new programs for customers. The
Company expects that approximately 60% of its capital spending will be for new
and expanded product programs, with the remainder going to cost reduction and
productivity enhancement programs and the Company's new Powertrain Technical
Center.
As of June 30, 2001 and December 31, 2000, the Company had sold $150 million of
receivables under a $153 million Receivables Transfer Agreement for face value
without recourse.
Other balance sheet changes of significance included fixed assets, which
declined $12.6 million and goodwill, which declined $23.9 million. Depreciation
was approximately equal to capital spending, almost all of the decrease in net
fixed assets was due to foreign currency exchange rate changes. The goodwill
decline is principally due to goodwill amortization.
The Company believes that the combination of cash from operations and available
credit facilities will be sufficient to satisfy its cash needs for the current
level of operations and planned operations for the remainder of 2001, despite
the industry downturn. The Company plans to continue to manage its operations
to minimize the need for net new investments until it becomes more evident that
the Company's product markets are recovering.
OTHER MATTERS
Sale of fuel systems
In April 2001, the Company sold its fuel systems business. This business was
acquired as part of the acquisition of Kuhlman Corporation in March 1999. After
evaluating its business, metal fuel tanks and related components for the heavy-
and medium-duty truck markets, the Company determined this business to be
non-core. The proceeds were used for general corporate purposes, including the
repayment of indebtedness. This business has been included in the divested
operations category for business segment reporting since acquisition. The
transaction did not have a significant impact on the Company's results of
operations, financial condition or cash flows.
Litigation
As discussed more fully in Note 6 to the Consolidated Financial Statements,
various claims and suits seeking money damages arising in the ordinary course of
business and involving environmental liabilities have been filed against the
Company. In each of these cases, the Company believes it has a defendable
position and has made adequate provisions to protect the Company from material
losses. The Company believes that it has established adequate provisions for
litigation liabilities in its financial statements in accordance with generally
accepted accounting principles.
In connection with the sale of Kuhlman Electric Corporation, the Company agreed
to indemnify the buyer and Kuhlman Electric for certain environmental
liabilities relating to the past operations of Kuhlman Electric. During 2000,
Kuhlman Electric notified the Company that it discovered potential environmental
contamination at its Crystal Springs, Mississippi plant while undertaking an
expansion of the plant.
The Company has been working with the Mississippi Department of Environmental
Quality ("MDEQ") and Kuhlman Electric to investigate the extent of the
contamination. The investigation has revealed the presence of PCBs in portions
of the soil at the plant and neighboring areas. In cooperation with the MDEQ
and the United States Environmental Protection Agency, the Company has addressed
the contiguous areas, and has submitted plans to address additional areas. In
May 2001, Kuhlman Electric and others, including the Company, were sued by
twenty-two plaintiffs, who claim personal and property damage. The Company has
moved to be dismissed from this lawsuit.
The Company has filed a lawsuit against Kuhlman Electric seeking a declaration
of the scope of the Company's contractual indemnity. As the clean-up is
continuing, and the courts have not yet ruled on the lawsuits, the Company
cannot currently estimate the potential liability associated with this matter.
Dividends
On July 19, 2001, the Company declared a $0.15 per share dividend to be paid on
August 15, 2001 to shareholders of record as of August 1, 2001.
New Accounting Pronouncements
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. This statement standardizes the accounting for
derivative instruments by requiring that an entity recognize all derivatives as
assets or liabilities in the statement of financial position and measure them at
fair value. When certain criteria are met, it also provides for matching the
timing of gain or loss recognition on the derivative hedging instrument with the
recognition of (a) the changes in the fair value or cash flows of the hedged
asset or liability attributable to the hedged risk or (b) the earnings effect of
the hedged forecasted transaction. The company has a small number of derivative
instruments. Application of SFAS 133 did not have a material impact on the
Company's results of operations or financial condition.
On April 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 140 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." The adoption of this statement has not had
and is not expected to have a material effect on the Company's results of
operations, financial condition or cash flows. Further disclosure may be found
in Note 11 to the financial statements.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations" and SFAS No. 142 "Goodwill and
Other Intangible Assets".
SFAS 141 requires that all business combinations completed after June 30, 2001
be accounted for under the purchase method only and that certain acquired
intangible assets in a business combination be recognized as assets apart from
goodwill. There are also transition provisions that apply to business
combinations completed before July 1, 2001, that were accounted for by the
purchase method.
SFAS No. 142, effective January 1, 2002, specifies that goodwill and some
intangible assets will no longer be amortized but instead will be subject to
periodic impairment testing.
The Company is currently assessing the impact that adoption of SFAS No. 141 and
SFAS No. 142 will have on its financial position and results of operations. As
of June 30, 2001, the Company had goodwill, net of accumulated amortization, of
approximately $1,179.2 million, which will be subject to the transitional
assessment provisions of SFAS No. 142. Amortization expense related to goodwill
was $20.9 million in and $21.7 million for the six-month periods ended June 30,
2001 and 2000, respectively.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations may contain forward-looking statements as
contemplated by the 1995 Private Securities Litigation Reform Act that are based
on management's current expectations, estimates and projections. Words such as
"expects," "anticipates," "intends," "plans," "believes," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. Forward-looking statements are subject to risks and
uncertainties, which could cause actual results to differ materially from those
projected or implied in the forward-looking statements. Such risks and
uncertainties include: fluctuations in domestic or foreign vehicle production,
the continued use of outside suppliers, fluctuations in demand for vehicles
containing the Company's products, general economic conditions, as well as other
risks detailed in the Company's filings with the Securities and Exchange
Commission, including the Cautionary Statements filed as Exhibit 99.1 to the
Form 10-K for the fiscal year ended December 31, 2000.
Item 3. Quantitative and Qualitative Disclosure about Market Risks
The Company's market risk exposure at June 30, 2001 is consistent with the types
of market risk and amount of exposure presented in its 2000 Annual Report on
Form 10-K.
PART II
Item 1. Legal Proceedings
There have been no significant developments in the legal proceedings disclosed
in the Company's Form 10-Q for the quarter ended March 31, 2001.
Item 4. Submission of Matters to a Vote of Security Holders
On April 25, 2001, the Company held its annual meeting of stockholders. At such
meeting, Jere A. Drummond, John F. Fiedler and Ivan W. Gorr were elected as
directors to serve for a term expiring in 2004. Each of Phyllis O. Bonanno,
William E. Butler, Andrew F. Brimmer, Paul E. Glaske, Alexis P. Michas and John
Rau continued to serve as directors following the meeting. At such meeting, the
following votes were cast in the election of directors:
For Withheld
------- ------
Jere A. Drummond 20,992,461 318,039
John F. Fiedler 20,991,005 319,495
Ivan W. Gorr 20,982,913 327,587
At such meeting, the selection of Deloitte & Touche LLP as independent auditors
was approved by the following votes:
For Against Abstain
---------- ------- -------
21,041,896 214,293 54,311
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
BorgWarner Inc.
(Registrant)
By /s/ William C. Cline
(Signature)
William C. Cline
Vice President and Controller
(Principal Accounting Officer)
Date: August 14, 2001